EXCLUSIVE: State alleges fraud by key Cincy startup lender

Aug. 12, 2013

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Ohio’s Division of Securities is threatening to shut down SoMoLend Holdings LLC, the local startup that connects small businesses seeking loans with individual lenders and institutions.

In a notice dated June 14 but not previously reported, the state alleges that SoMoLend and its CEO, Candace Klein, made statements and engaged in activity that included making fraudulent financial projections; false and misleading statements regarding current and past performance; and false and misleading statements about SoMoLend’s relationships with banks and other institutions.

The notice also says SoMoLend – which stands for Social Mobile Local Lending – did not obtain the necessary state and federal licenses to run its peer-to-peer lending business, which allows small businesses to borrow money in exchange for making principal payments plus interest.

Investors lend money to borrowers through SoMoLend, which packages the loans and sells them as notes. SoMoLend receives a fee or commission for facilitating the loans.

Klein said Sunday that SoMoLend is in discussions with the state, and stressed that that state will not issue a final order until after a hearing scheduled in October. She said she could not respond to the state’s specific allegations.

Rahul Bawa, a SoMoLend board member, confirmed the ongoing discussions with the state, and said SoMoLend has stopped making loans in Ohio.

SoMoLend, which launched in 2011, had raised $2.18 million from 31 investors through Feb. 27 of this year to build its business, according to the state. Those investors include CincyTech, the downtown-based public-private seed-stage fund, and the Queen City Angels, a group of experienced, accredited investors. Bawa is the director of digital and software investments at CincyTech, which typically takes a seat on the board of its portfolio companies.

Klein has received considerable local and national attention for advocating “crowdfunding,” both in the form of loans such as the ones SoMoLend facilitates and in the form of equity investments, which are currently restricted to accredited investors with an income of at least $200,000 a year or a net worth of at least $1 million.

She was the subject of a New York Times profile in January and has been featured in other national publications for her advocacy on relaxing rules around crowdfunding equity investments. The U.S. Securities and Exchange Commission is considering rules for allowing such solicitations of public investment following the passage of last year’s JOBS Act.

The state’s investigation could threaten Klein’s ability to effectively advocate for equity-based crowdfunding. Among the state’s allegations are that SoMoLend and Klein:

• Repeatedly and publically cited “significantly higher, false performance figures” in presentations to potential investors and in interviews. In a March 2013 interview, Klein told Entrepreneur Magazine that SoMoLend had raised $15 million for 100 businesses. The state says that at the time, SoMoLend had closed 25 loans for 18 businesses, totaling $234,000.

• Failed to disclose to potential investors that SoMoLend’s intended business activity was not legal without proper state and federal licenses, and that SoMoLend had not obtained those necessary licenses.

• Routinely projected millions of dollars in annual revenues and profits without including cautionary language or risk factors. The state noted several examples, including a presentation slide deck for investors and potential investors that showed SoMoLend revenues climbing from $44,798 in 2012 to $71 million in 2016. The presentation showed profitability projections trending from a loss of $1.1 million in 2012 to a profit of $35.8 million in 2016. As of June 14, the state says SoMoLend had generated $3,404 of revenue.

• Made “false and misleading statements” to investors about the nature of its various business relationships with banks and other financial institutions. In a public webinar in April, Klein said SoMoLend had about 43 banks lending on its platform. At the time, the state says, only one bank had made a loan through SoMoLend’s crowdfunding platform.

• Failed to ensure that the businesses seeking loans on SoMoLend’s platform were registered with the state’s Division of Securities or had obtained an exemption. As of June, the state says just three out of approximately 198 borrowers made any filings with the division, exposing approximately 200 businesses to potential liability.

Bawa, citing SoMoLend’s ongoing discussions with the state, said he also could not comment on the state’s specific allegations. Another SoMoLend board member, Madeleine Ludlow, declined to comment Sunday. A QCA Angels representative also said he could not comment.

SoMoLend’s model was in part designed to help small, non-traditional businesses that struggle to obtain financing from banks access credit. Banks have largely shifted their focus to serving larger, more established businesses.

The January New York Times story on Klein included comments from a Cincinnati store owner who said she obtained a $15,000 loan from KeyBank through SoMoLend, which eventually allowed her to obtain a $50,000 line of credit.

“It’s hard to open a small business, and SoMoLend has made it a little easier for us,” Stacey Shiring told the New York Times.